Luxembourg Tax Alert 2016-29

Luxembourg Tax Alert 2016-29

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Multilateral Convention (BEPS) – First step of implementation of tax treaty related measures to prevent base erosion and profit shifting

More than 100 jurisdictions including Luxembourg have concluded negotiations on a Multilateral Convention (PDF | 276KB) (or ‘multilateral instrument’, hereafter ‘the Convention’) that is intended to implement certain tax treaty related aspects of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative. The Convention, which was published on 24 November 2016 together with an Explanatory Statement (PDF | 555KB), is designed as a quick and effective mechanism to allow governments to bring their treaties into line with these aspects of the BEPS project, instead of renegotiating individual treaties. The OECD anticipates that up to 2000 treaties could be amended in this way.

The existing agreements for the avoidance of double taxation with respect to taxes on income, whether or not other taxes are also covered, of the signing party, will be modified after the Convention comes into effect. Parties will have to make a notification to the OECD (which will be the depositary of the multilateral instrument) listing the exact agreements they wish to be covered by the Convention.

The Convention will cover some of the BEPS recommendations, including those on Hybrid Mismatch Arrangements (BEPS Action 2), Treaty Abuse (BEPS Action 6 – minimum standard), in particular the limitation-on-benefits and principle purpose test rules or the anti-abuse rule for permanent establishments situated in third jurisdictions, the avoidance of permanent establishment status (BEPS Action 7), and finally the improvement of dispute resolution (BEPS Action 14 – minimum standard).

Where a provision reflects a BEPS minimum standard, opting out of that provision is possible only in limited circumstances, such as where a tax treaty to be modified already meets that minimum standard. Where a minimum standard can be satisfied in different ways, the Convention does not give preference to a particular way of meeting the minimum standard. In cases where contracting jurisdictions each adopt a different approach to meeting a minimum standard that requires the inclusion of a specific type of treaty provision, those jurisdictions must endeavour to reach a mutually satisfactory solution consistent with the minimum standard.

Parties can make reservations in line with the provisions of the Convention. Where a substantive provision does not reflect a minimum standard (e.g. provisions related to hybrid mismatches and measures against avoidance of permanent establishment), the signing party is generally given the flexibility to opt out of that provision entirely (or, in some cases, out of part of that provision).

Where a party uses a reservation to opt out of a provision of the Convention, that provision will not apply as between the reserving country and all other parties to the Convention. Accordingly, no modifications will be made to any of the covered tax treaties of the reserving party in this respect.


Timeline

The Convention will be open for signature by any country as of 31 December 2016. It will enter into force after five countries have ratified, accepted or approved it. It will further enter into effect after all parties to that treaty have ratified the instrument and a certain period defined by the Convention has passed to ensure clarity and legal certainty.

Governments are currently preparing their lists of treaties to be covered by the Convention and are considering which options to select and reservations to make. A first high-level signing ceremony is expected to take place in early June 2017.

The OECD will further develop guidance to support governments to prepare their own processes for signature, ratification and implementation. The covered treaties, reservations and options of the jurisdictions will be published online at a later stage.


KPMG Luxembourg comment

The conclusion of the Multilateral Convention is the first step in the process of transposing the results from the BEPS project into tax treaties. The Convention now needs to be ratified and the tax treaties to which it is to apply are still to be specified by each country. Luxembourg as any participant to the Multilateral Convention, will thus have to determine which tax treaties out of 76 (if not all) will be covered, as well as any reservations or options it wants to make.

 

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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